Greg Hinz On Politics

Feud breaks out over security of CPS debt

An unusual verbal war has broken out between two bond rating agencies over the security of investing in Chicago Public Schools debt, with discussion of bankruptcy, litigation and another $400 million in higher property taxes.

One point of disagreement was over how much faith investors can have that CPS will pay off $730 million in capital bonds for school construction and related projects that it recently issued. The bonds are secured by a special $45 million-a-year property tax hike.

Moody's didn't rate the issue, but in a review of CPS finances it issued last month, it said the quality is "at least as strong as, if not modestly stronger than, CPS's general obligation bonds." However, that doesn't mean much, since Moody's rates CPS GO bonds as junk: B3, with a negative outlook.

Fitch was much more upbeat, rating the capital bonds A1. In its report today, it says it did so because, "In our view, the overall legal framework (of the bonds) renders remote a successful challenge to the status of the debt" if CPS filed for bankruptcy.

Of at least as much interest is the other dispute: Whether CPS can tap state aid funds that normally are supposed to go to pay debt and instead use them for operations. Doing the latter could trigger a property tax hike that Moody's set at up to $400 million a year.

Shifting the state money to day-to-day operations "would help alleviate budget pressures but would also carry significant credit risks," Moody's wrote. "While investors would still benefit from the unlimited property tax pledge, some could perceive future CPS GO borrowings as less secure than they had previously understood. CPS's cost of borrowing could then rise to the 9% maximum allowed under state law, or the district could lose market access altogether."

Also, it said, raising taxes could be "politically difficult" after $1.1 billion in property taxes and other levies pushed through by Mayor Rahm Emanuel to pay for government pensions.

I suspect they're right about the politics.

In Fitch's view, CPS can't do this at all, at least not without violating the state's property tax limitation law. Any move in that direction would invite legal actions by objectors, it said.

CPS declined to comment on the Fitch statement. Moody's referred me to its earlier review.

All of the above exchange is, to some extent theoretical. For instance, Illinois law does not now allow government bankruptcy, though Gov. Bruce Rauner repeatedly has raised the possibility.